After Fannie, Freddie’s wild ride, future is murky

It’s fair to say that Fannie Mae and Freddie Mac investors had a bumpy ride this week.

On Tuesday common shares for Fannie
FNMA, -4.28%
and Freddie
FMCC, -4.26%plunged 31% and 27%, respectively, after lawmakers announced a blueprint to wind down the federally controlled mortgage buyers. Losses were extended Wednesday, but then investors tiptoed back into the shares on Thursday.

Preferred shares in Fannie
FNMAS, +3.16%
and Freddie
FMCKJ, +5.26%
also dropped this week, but there was less panic among these investors. Many of these holders are in their positions for the long haul, and these series each fell less than 4% on Tuesday.

Despite this activity, the outlook hasn’t changed much for the firms. That is, it’s still pretty murky.

“You’re probably going to have continued volatility in these asset classes as investors try to gauge what the end game is,” said Corey Boles, an analyst at Eurasia Group, a political-risk consultancy.

Yes, U.S. senators are taking an important step by introducing a piece of major housing-finance reform with bipartisan support. But analysts agree that there are vanishing chances for the Senate to approve a bill this year. Even if senators make progress next year on the legislation, an agreement still must be reached with U.S. House lawmakers, and Republicans there want the government to play a smaller role in a reformed housing-finance system than what senators have proposed.

The Fannie-Freddie puzzler this week was the extreme reaction among investors to news of the legislation. The bill contained no surprises about lawmakers’ intent to eliminate the government sponsored enterprises. Indeed, the new proposal uses a prior plan for winding down the GSEs as its base text, with lawmakers making only a handful of changes in recent months to the underlying proposals.

“Taxpayers should ask for their money back,” said Edwin Groshans at Height Analytics.

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